Utah cities stay afloat financially Most well-managed, carefully balancing debt and cash flow

By Rebecca Palmer, Joseph M. Dougherty and Jared Page Deseret News

The tight global credit market is forcing some Utah towns to hold off on planned financing and requiring others to pay unexpectedly high interest rates for existing debt. Other cities are nervous about how their financing will be received in the marketplace. But compared with cities such as Vallejo, Calif., which has declared bankruptcy, and Kansas City, Kan., which can't finance a sewer system, most Utah cities are well-managed and have been careful to balance debt and cash flow, according to the results of a multi-jurisdictional survey by the Deseret News. Regardless, Park City is having to phase in financing for a needed water system. And Holladay, which last year instituted new taxes to pay for road repairs, could obtain financing for only part of its needs. West Bountiful is trying to fund $5 million in water bonds to upgrade its 50-year-old infrastructure. The city has been warned that finding investors is difficult, said city finance director Craig Howe. It's a similar story for Centerville, which is planning to build a multimillion-dollar performing arts center. Less imminent projects are being delayed for several months until record-high interest rates relax and corporations once again become interested in buying bonds. "There was a very quick freezing up of the (bond) market," said Kelly Murdock, senior vice president of Zions Bank and Salt Lake City's financial adviser. "Since that time, thankfully, the market is thawing out — albeit slowly. There's an abundance of cash on the sidelines out of concern of the direction of the economy." The Deseret News analyzed financial data from all Utah cities and towns with a population of 1,000 or more, as well as Utah's counties, to determine their levels of debt. Debt figures include total debt — bonded or otherwise — held by each municipality, its enterprise (water, sewer, electricity, golf course or other) funds, municipal building authority and redevelopment agency. Using those figures and the U.S. Census Bureau's 2007 population estimates, the News was able to rank counties, cities and towns by their debt per resident. Highs and lows The analysis showed that Hildale, the Fundamentalist LDS Church stronghold near the Arizona border, is by far the Utah municipality deepest in debt, at nearly $12,000 per resident. The town's financial statement for the fiscal year ending June 30, 2007, lists its total debt at $23.5 million, with $19.9 million of that listed as the town's portion of power, water and gas costs shared with neighboring Colorado City, Ariz. A joint management, operations and maintenance agreement between the two towns for Twin City Power has been in place since 1994. Each town has its own electric system, which is owned and financed by Twin City Power. Operating revenues and expenditures are determined by how much money each town is bringing into the system through its customers, according to a city report. On Election Day earlier this month, Hildale voters overwhelmingly supported Proposition 6, a ballot measure to allow the city to sell or transfer its stake in the power company and related assets in exchange for relief of $21.3 million in bond debt. The proposition passed with 98.5 percent approval. The move gets the city out of debt but also leaves it without a power source. Hildale officials plan to lease power from other providers. East Carbon is next on the list with more than $6,000 of debt per resident, followed by Park City ($5,200), Fairview ($4,800) and Moroni ($4,150). At the other end of the spectrum are debt-free municipalities Cottonwood Heights, Fruit Heights, Honeyville (Box Elder County) and Marriott-Slaterville (Weber County), and Bluffdale, with a debt of a little more than $1 per resident. Other noteworthy fiscally conservative municipalities include Delta, Farr West, Garland (Box Elder County), Kaysville, Layton, Lewiston (Cache County), Midvale, Naples (Uintah County), Roy, Sunset, Taylorsville, West Haven (Weber County) and West Point — each with $200 or less debt per resident. Among counties, Grand County has the highest debt per resident at a little more than $900, while Kane, Piute, Sanpete, Sevier, Uintah and Wayne counties all boast debt of less than $1 per resident. Many of Utah's developing communities have high debt-per-capita rates, a function of their need for infrastructure compared with relatively small tax bases. Payson, American Fork, Eagle Mountain and Lehi are among the highest in municipal debt per person statewide. The Utah County cities have used financing to pay for scales at the landfill, secondary irrigation, a swimming pool and a golf course, among other things. Credit ratings Cities need them, too. A high debt-per-capita rate isn't the whole story behind a city's financial well-being. That rate, calculated in the financial markets, normally includes only the general obligation bond debt. To get a look at a municipality's financial health, you need to look at how much debt the entity has compared to the taxable value of the land in the city, as well as other formulas. Fortunately, Standard & Poor's and Moody's do this for cities willing to pay $5,000 to $7,000 for a bond rating. By comparing bond ratings from Moody's and Standard & Poor's, two of the three largest bond-rating agencies, the News analyzed the marketability of each entity's debt. The two agencies use similar credit ratings. A rating of AAA or Aaa is the best, meaning the city's bond is well positioned to be a low risk for investors. The AAA rating is followed by AA or Aa, A and BBB or Baa, depending on the agency. No local governments in Utah fell below the BBB or Baa rating, which means every rated municipal bond in Utah is suitable for investing. Some bonds, however, are not rated. That doesn't mean they're junk, says Laura Lewis, a principal with financial planning firm Lewis, Young, Robertson and Burningham, which serves two-thirds of the top 25 cities in Utah (those with a population of 25,000 or more). It likely means that it made financial sense to save the cost of buying a rating, she said. Fiscal philosophies Utah cities that have abstained from accruing debt cite good cash flow, strong infrastructure and a city council concerned with residents' pocketbooks, said Cottonwood Heights treasurer Gary Harmer. "Our council has just been very conservative and has not been willing to take on projects that would require debt," Harmer said. In Herriman, the philosophy is to bond only for construction costs, not for operations and maintenance, said Mayor Lynn Crane. "We want to operate on money we have." Municipalities such as Sandy believe in balancing debt and cash flow to ensure long-term stability, said finance director Art Hunter. Sandy's long-term debt-per-capita is $662, which is on the low end of the spectrum. However, Sandy has taken out bonds for multiple redevelopment projects, and its $10 million bond for the Real Salt Lake stadium raised a few eyebrows. As with many other cities, none of Sandy's debt is from general-obligation bonds. It has all been approved by the City Council. Lewis said going into debt makes sense for cities that are seeing exponentially rising construction costs. A city trying to save up enough cash for a project could benefit from bonding with a 3 percent or 4 percent interest rate if construction costs are rising 10 percent to 12 percent in a year. Lewis helps train new mayors and council members at the Utah League of Cities and Towns, and she says many newcomers to local government feel a paranoia about city debt. But then she asks how many paid cash for their homes. Not many. Most homeowners have or had a mortgage at one time. "That's how you have to pay for certain large projects," she said. The Utah Taxpayers Association believes that carefully deliberated municipal debt can be necessary, but the group has spoken loudly against placing financial obligation on residents when corporations receive the benefit. Debt for redevelopment projects that don't create new jobs is unsound and inappropriate, said Royce Van Tassell, vice president of the association. The group also takes issue with municipal bonding for projects like recreation centers and golf courses, saying those things should be left to the private sector. What cities are buying Regardless, the vast majority of Utah cities and towns have taken on debt for such projects, according to the Deseret News analysis. Salt Lake County has gone a step beyond, accruing debt for the arts and Hogle Zoo. In Park City, Summit County and Draper, voters have chosen to increase their property taxes to pay for bonds that funded open space purchases. "We try to balance funding our capital projects with both cash and debt, and we think given the fact that the voters approved this that they are agreeing to pay it," said Park City manager Tom Bakaly. But many bonding projects are the result of needs to provide services to local residents. Most cities that have bonded debt have pledged revenue to build infrastructure for a water system, sewer system or other utility. Many have built new city halls or other buildings. But recent economic uncertainty has made many Utahns reluctant to support bonding for certain projects. American Fork voters, for example, soundly rejected this month five new bonds totaling $18.6 million to expand and improve various roads, a park, trails and a cemetery. Voters also took Election Day stances against the sale of $940,000 in general obligation bonds for fire equipment in Box Elder County and the sale of $10 million in bonds for open space in Cache County. The Salt Lake City Council recently voted to move forward with plans to build a new fleet-maintenance facility, using up to $32 million in sales-tax revenue bonds. Councilman JT Martin has opposed the action, expressing concern about the financial commitment the city would be making in an "unprecedented economic situation." "It's something that's needed," Martin said of the facility, "but the timing is really bad. I would prefer that we wait for a while to see what the bond market is doing." Voters in Springville, however, just approved issuing $9.8 million in bonds over the next 21 years to cover the costs of building a new library. And Salt Lake County voters agreed to $52.6 million in bonds for improvements to Hogle Zoo and Tracy Aviary. Financial sense? A rule of thumb for investors is that bonds are generally considered a low-risk investment because governments rarely default on their loans. And financial advisers often make the case for plugging some money into bonds in case the economy goes sour and the stock market doesn't perform. If you look at a graph of the average bond interest rate over the past year, you see that it tracks fairly closely with the 10-year treasury bill, a way of investing in the federal government. Usually, when the treasury bill is up, bonds are down and vice versa. Right now, revenue bonds are estimated to return about 6 percent, a rate that hasn't been seen since 2000. That higher rate means cities pay a higher interest rate. "A rational investor would look at this and say, 'I'm buying municipals all day long,"' Lewis said. But because investors are skittish right now, there is a municipal bond backlog of $18 billion to $19 billion nationwide, Lewis said. That might make it difficult for cities that are starting the bonding process now, such as West Bountiful, Centerville and South Jordan. Conservative state Overall, Utah and its municipalities have benefited from conservative spending and a strong economy, said bond attorney James C. Burr. "The bond market here in Utah has always functioned very well," Burr said. "There has been a lot of financial prudence. ... Cities we've worked with have only issued bonds for projects that need to be financed and that the electorate is willing to support." Lewis, who often travels to San Francisco with clients to meet with rating agencies, echoes Burr's assessment. Utah cities don't have the liabilities, such as post-employment benefits, other U.S. cities have, and manage to conservatively plan for the future. When Lewis talks with analysts after her meetings, she hears, almost without fail, how easy it is to work with Utah cities. "Utah credits are the easiest ones to rate," she hears. Analysts see the best of the best and the worst of the worst, and on the whole, Utah cities are conservative with their debt management, she said. Contributing: Ethan Thomas, Rodger L. Hardy, Arthur Raymond, Jens Dana and James Davis E-mail: rpalmer@desnews.com; jdougherty@desnews.com; jpage@desnews.com

DeseretNews.com Originally published Sunday, Nov. 23, 2008

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